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Kabateck Brown Kellner, LLP: Northstar Student Lender Sued for Breaking Contract

2008-07-14 15:31:00

 Lured students with promise of rate reduction, then eliminated it to boost

    revenues; Student borrowers stand to lose $570 million, states suit

    LOS ANGELES, July 14 /EMWNews/ -- Northstar Education Finance broke

its contract with its student loan customers and raised their interest

rates to generate extra revenues to cope with its financial difficulties, a

class action lawsuit filed today in U.S. District Court, Central District

of California in Los Angeles by Kabateck Brown Kellner, LLP states. The

suit also states that the scheme would reap $570 million for Northstar.

    "What kind of corporation protects its profits by breaking a contract

it's made with student borrowers?" said Brian Kabateck, Managing Partner of

Kabateck Brown Kellner. "To add insult to injury, the borrowers they're

targeting are those the company has recognized for their on-time payment

histories. Student borrowers have been victimized too many times and in too

many ways by the student lending industry. We're going to make sure they

don't get away with it this time. Northstar is preying on recent graduates

trying to pay off huge student debts in a bad economy."

    Northstar is one of the nation's largest student lenders, with a loan

portfolio of $5 billion. Northstar consolidates student loans. Its business

model is predicated on providing borrowers with substantial reductions of

their monthly payments. One of its key enticements for customers was its

"T.H.E. Repayment Bonus" program, which reduced borrowers' interest rates

by .75% if they were up-to-date on their payments for 60 days. The program

is incorporated into the binding contract between borrowers and Northstar.

In February 2008, with Northstar (like other financial institutions)

feeling an economic crunch, the firm announced it was "temporarily"

suspending the program.

    For the plaintiff named in this case, that means a 33% increase in her

monthly payments -- from $120 to $160.

    The suit seeks to force Northstar to reimburse students for their extra

payments and to comply with the terms of the contract they entered into

with their borrowers by reinstating the .75% interest rate reduction.

    The notice Northstar sent to its borrowers informing them of the

program's suspension can be accessed here:

    Despite the claim made in the notice, the terms of the "T.H.E.

Repayment Bonus" program were not subject to change.

    Northstar is candid in discussing its motive for breaking its contract

in this notice: "The money used to fund student loans comes primarily from

the sale of bonds and other securities. Due to the credit crunch, the cost

of financing has increased significantly over the last six months. In

addition, student loan providers are facing much higher interest rates on

securities used to finance loans that have already been made."

    Northstar is coping with their increased costs by raising its

borrowers' interest rates, despite the terms of their contract, states the


    According to the Minneapolis Star-Tribune, St. Paul-based Northstar

operates with "A shell nonprofit make[ing] the loans, while a for-profit

subsidiary services them and pays employees."

    The Star-Tribune also reported that while "NorthStar Education Finance

was created with state money as a not-for-profit company that would

guarantee loans Minnesota students took out for college," today, its

for-profit executives take home millions of dollars a year in compensation.

Northstar was cited by New York Attorney General Andrew Cuomo in his

high-profile investigation into the student lending and was among the

lenders cited by a U.S. Senate committee report into questionable marketing

practices, according to the Star-Tribune.

    Kabateck Brown Kellner, LLP is one of the nation's foremost consumer

law firms. Its clients have won more than $750 million against Google,

Farmer's Insurance, Eli Lilly and other major corporations. As a

plaintiff's-only firm, Kabateck Brown Kellner is always on the consumers'


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